Newegg on trial: Mystery company TQP rewrites the history of encryption

Once-secret details of a mass-lawsuit operation are revealed in Texas courtroom.

Spangenberg: Business is booming

In 2008, Spangenberg was aggressively building up his patent empire. His first suits were nearing completion. Under the name Orion IP, he took a patent case against Hyundai to trial in East Texas and won a devastating $34 million verdict.

That verdict ultimately fell apart on appeal. But in 2008, it sent a powerful message to corporate America. And it made Spangenberg want more patents. Later that year, he acquired the Jones patent.

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Today, Spangenberg is perhaps the most prolific patent litigator of them all. In 2012, companies connected to his IPNav company filed suit against 357 companies, more than anyone else, according to an RPX study. The study said he has sued more than 1,600 companies in all. A profile of him in the New York Times earlier this year, titled "Have Patent, Will Sue," was actually a boon to his business, he has said; his inbox was inundated with e-mails after its publication. It wasn't hate mail—the messages were from people wanting to license their patents.

In opening statements on Tuesday, jurors got a preview of how Spangenberg would be portrayed during the trial. Newegg intended to stop TQP's licensing in its tracks by revealing how the widespread licensing business, denounced by critics as "patent trolling," really works. (Parties are barred from using that term in court.)

"Mr. Spangenberg's business is to purchase patents and set up companies to own them and then to sue companies to make money," explained Newegg lawyer Baldauf—gently, without any rancor. Newegg and TQP aren't competitors in any sense; "TQP is a very different company," he said.

On the stand, neither Spangenberg nor his lawyers sugar-coated his licensing business. He didn't try to obscure his operations, hide behind more shell companies, strive to keep the nature of his business secret, or pretend to be an operating company—all strategies that many other "trolls" take.

Spangenberg is 5' 6"—he told the NYT that he was bullied over his stature as a youth—and when he huddled with his team of five or six lawyers, they loomed over him. On the stand, he spoke quickly—often too quickly; US District Judge Rodney Gilstrap, who has a booming voice, asked him more than once to slow down and speak up.

TQP lawyer Marc Fenster started with Spangenberg's family and background. He's married to a woman named Audrey, and has a 20-year-old son, Christian. Spangenberg grew up in Buffalo; his mother was a phone operator and his father was mostly a shop teacher. He didn't finish high school: "I was a good reader but a horrible student," Spangenberg told the jury. He took the ACT, "did well on it," and got into the University of Delaware on that basis.

"How well did you do on the ACT?" asked Fenster.

"I maxed it," said Spangenberg.

"Max, meaning...?"

"Top score."

College was followed by the London School of Economics, law school at Case Western Reserve University, and then a stint of several years in Dallas at Jones Day, a large law firm. He made partner and then left six months later. "It was something I desperately wanted until I got it, and then I no longer wanted it."

Spangenberg: 800 lawsuits, no apologies

After giving his background, it was fast-forward to the TQP deal. A colleague had brought the opportunity to buy the patent in question to his attention, and he was intrigued by its wording.

"I understood pseudo-random. As somebody trained in math, when I see pseudo-random, I'm like—something is either random or it's not. There are some writings by some famous theorists about whether or not pseudo-random had value. We actually used it in gaming theory, but I didn't realize it was being used in encryption. So it piqued my interest because it just didn't look like it fit."

He offered $750,000 for the patent, and the deal was done. He spent another $1.2 to $1.3 million "further analyzing" the patent. He believed the patent had incredible value, he said.

"After talking to them, I believed it was widely in use, and it was greatly assisting or enabling Internet commerce," he said.

"Did you believe that the '730 patent was worth $750,000?" asked Fenster.

"A lot more than that," said Spangenberg.

That has proven to be true.

Spangenberg started filing lawsuits, and corporate America began paying him to settle them.

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To make the $45 million, Spangenberg has licensed the '730 patent to 139 companies in 93 separate deals. On cross-examination, Spangenberg acknowledged that almost every TQP deal was done via a lawsuit.

"In what percentage of those negotiations did you file a lawsuit against the company before you contacted and tried to enter a license with them?"

"80 percent of the time."

"So to make sure I understand, at least 800 times you filed a lawsuit against companies before you began license negotiations with them?"

"Yes."

Spangenberg didn't back down from the legitimacy of his business one inch.

"Microsoft and Apple are relatively easy to deal with, relatively open," he explained. But other companies aren't like that, he said. "You're dealing in an environment where you're the underdog. It's not infringed, it's invalid, and, you know, you're crazy as to the numbers that we actually do."

So the lawsuits began. Spangenberg and his lawyers believe that any website that uses the combination of SSL together with the RC4 cipher infringe the Jones patent. The fact that using the RC4 cipher is typically a choice made by customers via their browsers doesn't matter in Spangenberg's view; the customers' actions are part of the infringement.

Target had a website; Target got sued by TQP. It got out of the case by paying $40,000.

If Spangenberg has his way, Newegg and Cheng will pay much more than any of those earlier targets. Newegg has fought back, and now the company faces not the typical mid-six-figure demand, but the demands of TQP's professional damages expert. That expert, Stephen Becker, told the jury that Newegg should pay more than $5 million. That's about 7 cents per click for every order placed on the Newegg site from 2005 until May 2012, when the patent expired.

Correction: an earlier version of this story incorrectly referred to Spangenberg's wife as being a lawyer.